The Unloved Dollar Standard

From Bretton Woods to the Rise of China

Ronald I. McKinnon

This book presents a perspective on the role of the dollar exchange rate in undergirding multilateral trade on a global basis, both as a facilitator and as an anchor. Instability in the dollar standard is linked to commodity price bubbles, particularly spikes in the world price of oil in the 1970s and since 2007.

The Unloved Dollar Standard

From Bretton Woods to the Rise of China

Ronald I. McKinnon

Description

The world dollar standard is an accident of history that greatly facilitates international trade and exchange-even trade not directly involving the United States. Since 1945, the dollar has been the key currency for clearing international payments among banks including interventions by governments to set exchange rates, the dominant currency for invoicing trade in primary commodities, and the principal currency in official exchange reserves.

Although the strong network effects of the dollar standard greatly increases the financial efficiency of multilateral trade, nobody loves it. Erratic U.S. monetary and exchange rate policies have continually made foreigners unhappy. A weak and falling dollar led to the worldwide price inflations of the 1970s and
contributed to the disastrous asset bubbles and global credit crisis of the noughties -- including the global credit crunch of 2008-09. Dollar weakness aggravated the postwar world's three great oil shocks in 1973, 1979, and 2007-08. After 2008, the U.S. Federal Reserve Bank's policy of keeping short-term interest rates near zero and out of alignment with emerging markets on the dollar standard's periphery, makes the international monetary system vulnerable to 'carry' trades: hot money inflows into the periphery that cause a loss of monetary control, commodity bubbles, and worldwide inflation . When these carry-trade bubbles suddenly unwind, they can result in huge swings in exchange rates and credit crunches.

The asymmetrical nature of the dollar standard also makes many
Americans unhappy because they cannot control their own exchange rate. Under the rules of the dollar standard game as explained in chapters 2 and 3 of this book, foreign governments may opt to set their exchange rates against the dollar while, to prevent conflict, the U.S. government typically does not intervene. Nevertheless, Americans often complain about how foreigners set their dollar exchange rates unfairly. Japan bashing in the late 1970s to the mid-1990s over the alleged under valuation of the yen, and China bashing in the new millennium over the alleged undervaluation of the renminbi, are two cases in point.

Thus, while nobody loves the dollar standard, the revealed preference of both governments and private participants in the foreign exchange markets since 1945 is to
continue to use it. As the principal monetary mechanism ensuring that international trade remains robustly multilateral rather than narrowly bilateral, it is a remarkable survivor that is too valuable to lose and too difficult to replace. This book provides historical and analytical perspectives on the different phases of the postwar dollar standard in order to better understand its resilience in spite of the great volatility in today's global monetary system.

The Unloved Dollar Standard

From Bretton Woods to the Rise of China

Ronald I. McKinnon

Author Information

Ronald McKinnon is the William D. Eberle Professor Emeritus of International Economics at Stanford University, where he has taught since 1961. He has been a consultant to central banks and finance ministries all over the world, including agencies such as the World Bank, International Monetary Fund, and European Central Bank.

The Unloved Dollar Standard

From Bretton Woods to the Rise of China

Ronald I. McKinnon

Reviews and Awards

"Ronald McKinnon is a seminal figure in the development of modern international monetary economics, but also an iconoclast with a distinctive view. This book is as good a summary statement as any of 'McKinnonomics.' Well worth reading as always."--Barry Eichengreen, George C. Pardee & Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley

"Ron McKinnon has written a masterful summary of the attractiveness of the U.S. dollar to foreign central banks and investors, and why the dollar standard has survived and flourished despite the challenges from the SDR, the Euro, the Japanese yen, and presumably the Chinese yuan. Government institutions and investors in Europe, Latin America, and Asia buy U.S. dollar securities because these purchases satisfy their interests; the 'dollar is the best game in town'. The paradox is that the U.S. payments deficit is a sign of the strength of the U.S. dollar."-- Robert Z. Aliber, Professor of International Economics and Finance Emeritus, Booth School of Business, University of Chicago

"Ron McKinnon is an original thinker, an iconoclast who always challenges the conventional wisdom, and never more so than in this latest book. He argues that the Fed should aim to stabilize the dollar's exchange rate, and that their current policy to push down interest rates to the zero lower bound has been wrong, both for the USA and for the wider world. His arguments may not find favour, but they are cogently and forcefully presented. This book should be a goad for policymakers and a stimulus for everyone else."--Professor Charles Goodhart, Emeritus Professor of Banking and Finance, London School of Economics

"McKinnon presents an analysis reflecting insights gained over a lifetime's distinguished career as an academic and a consultant. ... Through sophisticated and subtle analysis supported by empirical data graphically presented, he concludes that the persistent deficits in the US balance of payments are not a product of exchange rate distortions but rather of a national savings deficit. ... Recommended." --CHOICE

The Unloved Dollar Standard

From Bretton Woods to the Rise of China

Ronald I. McKinnon

From Our Blog

Ronald McKinnon
In late February, the slow appreciation of China's currency was interrupted by a discrete depreciation from 6.06 to 6.12 yuan per dollar. Despite making front page headlines in the Western financial press, this 1% depreciation was too small to significantly affect trade in goods and services'and hardly anything compared to how floating exchange rates change among other currencies.